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20 reasons pensions go wrong

As a financial journalist I've come across a lot of evidence demonstrating why pensions go wrong over the years. Lots of the problems are avoidable, some are more down to chance.

Here I've thought of 20 reasons without too much effort. Being aware of the risks will allow you to plan around them.

If you can think of any more please, add them in the comments box below. 1. You don't save enough. We need to save a lot for retirement, particularly if we expect to live for decades after finishing work. When the time comes, more than half regret their lack of savings.

2. Optimistic projections. During the 80s and 90s you'd often hear people say gains of 15% per year were normal, when less than half that is realistic. Forecasts continue to be optimistic.3. You don't know what you need. Most people have no idea what pension pot they need to save, and how much they need to invest each month to get there. I've had a stab at helping you with that in How much you need to save for retirement.

4. You don't know where to save. You have to choose a pension provider, which is difficult in itself. On top of that, you can be bewildered by thousands of investment funds. This causes indecision and makes you more easily steered into expensive “default” funds.

5. You pay too high charges. In the long run, hidden and open charges can easily reduce your pension income by half or more.

6. You're too cautious. We worry too much about volatile stock markets. It sounds counter-intuitive but when you're a young, regular pension saver, you should want prices to fall, so that you can buy more shares at a cheaper price. However, after a crash, encouraged by headless chickens writing in the media, you're often scared into selling at a low point, and buying something less volatile that will probably do much worse in the long run.

7. You take too many risks. Alternatively, you get caught up in some crazy, esoteric investment that is not protected by the Financial Services Compensation Scheme if it fails.

8. Your employer goes bust. You might save all your life in a company pension scheme so that you can get paid a third or half your salary when you retire, but if your employer goes bust and it hasn't put aside enough money to fund its employees' pensions, you might get far less than you were counting on.

9. Your employer reduces benefits. With salary-related pensions, your past contributions are assured, but it makes it hard to plan for retirement if halfway through your working career your employer lowers your benefits on future contributions.

10. You get suckered in by marketing. “Smoothing”, “absolute returns” and other fine-sounding investment ideas can make it very difficult to make good gains, in the long run. Treat anything that tries to comfort you by making your fund more stable and less volatile in the short term with caution.

11. You follow the crowd. You might pull out of funds that have performed badly recently and put money into ones that have just done well. You're probably selling low and buying high. It's a common and costly mistake, often encouraged by the financial press.

12. You overestimate your knowledge and ability. The unsatisfactory truth is that most who actively try to beat the stock market over the long term do worse than those who just focus on keeping their investment costs down.

13. Tax on pension savings. The government is frequently changing income taxes and tax relief rules, both of which affect tax relief on our pension contributions. It makes planning harder.

14. Tax on your future pension income. We don't know what we'll be taxed when we retire either, which also makes planning harder.

15. Stealth tax changes. Politicians prefer to make tax changes that people can't understand, to hide their effects. Gordon Brown, for example, reduced the pension income we can expect to get by perhaps 10% with a tiny footnote in a budget in 1997, when he abolished a tax credit related to pension investments. 16. The sweet spot. Or rather the bitter spot – where you have saved just enough to be disqualified from benefits, but you're no better off than a retiree who has saved nothing all their lives... 17. The conundrum. ...Which gives you a conundrum. Do you save for the future, or spend it all and live off benefits? The reality is that relying on the state is simply too risky, but if you ever found out you'd have been better off enjoying the money rather than saving, it would be a bitter pill.

18. Overestimating your future pension income. It's not just disappointing investment gains that might cause you to undershoot your income requirements in retirement. As time goes by, we're living longer and our pots need to stretch out more, while also dealing with ever rising inflation. Even pension providers have been underestimating our longevity, so what chance do we have?

19. Claiming your benefits. Most people sell their pension pots in return for an annuity – a guaranteed income for the rest of your life. However, at least a third don't shop around, which makes your private pension income 15%-40% lower than it could be.

20. Huge risks with alternative pension incomes. Annuities aren't the only way to get an income in retirement, but, as many have learned in the past six months, choosing alternatives like income drawdown can be very risky, since you can see your income suddenly halve.